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Notebaert in the hot seat
Ruling goes against Qwest chief over Tellabs comments
By Jeff Smith, Rocky Mountain News
Thursday, January 26, 2006

Qwest CEO Dick Notebaert is in legal trouble over bullish statements he made while chief executive of Tellabs Inc., an Illinois maker of telecommunications equipment.  A federal appellate panel ruled Wednesday that portions of a shareholder lawsuit alleging that Tellabs and Notebaert deceived investors could proceed.  A lower court had dismissed the civil lawsuit, which covered the period between Dec. 11, 2000, and June 19, 2001.

Seventh Circuit Court of Appeals Judge Diane Wood wrote in a 28-page decision that some statements attributed to Notebaert about Tellabs' business at the time fell within acceptable corporate "puffery" or optimism.

But she found other statements to be "more troublesome, especially when viewed against the backdrop of the company's upbeat attitude."

Those included Notebaert saying in March 2001 that a key product was continuing to "maintain its growth rate" while sales actually were waning by an estimated $400 million.

"While it is conceivable that Notebaert had yet to see the (internal) reports suggesting his company was in trouble, the plaintiffs have provided enough for a reasonable person to infer that Notebaert knew that his statements were false," Wood wrote.

The irony of the Tellabs case is that it covers almost exactly the same period in which former Qwest Chief Executive Joe Nacchio is accused of misleading Qwest investors.

One major difference is that Notebaert apparently didn't sell Tellabs stock during that time, while Nacchio sold more than $100 million of Qwest stock in the first five months of 2001 and now faces 42 insider trading charges.  Nacchio has pleaded not guilty.

Also, Tellabs did lower overall sales projections in March 2001, but a much bigger revision came in June 2001.  While Tellabs stock declined from $63 to $21 a share during the class-action period, it stayed in the high $30s until the past few weeks.

The Tellabs shareholder lawsuit also makes insider trading allegations against Tellabs Chairman Michael Birck in connection with about $5 million of sales.  The three-judge panel allowed those allegations to proceed as well.

Qwest spokesman Chris Hardman said neither Notebaert nor the Denver telco had a comment on the ruling.

David Graham of Sidley Austin LLP, which is listed as counsel for Tellabs, Birck and Notebaert, referred questions to Tellabs.

Said Tellabs spokeswoman Ariana Nikitas:  "Tellabs believes this case is without merit.  Our counsel is reviewing this decision, which was just issued (Wednesday), and we cannot elaborate until that review is complete."

The shareholders' lead counsel is Milberg Weiss Bershad & Schulman, known for suing telecommunications companies.  Partner Richard Weiss told Bloomberg News he was pleased with the appellate court decision.

Wood also focused on statements by Notebaert in early 2001 that a new product was being shipped to meet strong demand.  Plaintiffs allege that the product wasn't even available until after June 2001.

But Wood also noted challenges the shareholders will face in proving their allegations, including a heavy reliance on 27 confidential sources.,2777,DRMN_23916_4416343,00.html